Yahoo Finance There's Reason For Concern Over Ciena Corporation's (NYSE:CIEN) Price
There wouldn't be many who think Ciena Corporation's (NYSE:CIEN) price-to-earnings (or "P/E") ratio of 17.2x is worth a mention when the median P/E in the United States is similar at about 19x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Ciena certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
See our latest analysis for Ciena
Keen to find out how analysts think Ciena's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Ciena's Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Ciena's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 57% gain to the company's bottom line. Pleasingly, EPS has also lifted 149% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 6.2% as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 5.2%.
In light of this, it's somewhat alarming that Ciena's P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.
The Final Word
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Ciena's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
You should always think about risks. Case in point, we've spotted 2 warning signs for Ciena you should be aware of.
If you're unsure about the strength of Ciena's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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